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Local Budget Cuts Will Leave A Hole In The Affordable Housing Capital Stack

A major gap in financing for the essential real estate sector of affordable senior housing is about to emerge.

Pennrose Properties' headquarters in the Brewerytown neighborhood of Philadelphia

City budgets all over the country promise to be much smaller in the coming year due to the drop in tax revenue caused by widespread business closures and job losses. Any city, including Philadelphia, will be hard-pressed to spare its housing department of cuts.

“I think that the shoe of shrinking municipal resources has yet to drop. You see it poised and ready to come down,” Pennrose Properties Regional Vice President Jacob Fisher said on Bisnow’s Philly Senior Housing Update webinar on Thursday. “A lot of resources for affordable housing we utilize are federal and blocked out to states through grants and such, and that money has been shrinking for years, adding to the challenge of making such projects work for years.”

Because senior citizens can require varying levels of social support and medical care, accommodating their housing needs is prohibitively expensive. For those who can’t afford the rents and initial fees of luxury complexes, what options remain almost universally rely on some form of subsidy, public financial assistance or tax credit program.

As the economy looks likely to remain in a recession for at least several more months, all of those resources will grow more scarce. The less money government directly provides for affordable senior housing, the more that development of said housing relies on private financing sources. As with any type of housing other than luxury, market-rate properties, private capital stacks are often a patchwork. 

"We’ve seen each of the three cities we’re operating in lose revenue, and revenue is the basis of some subsidies and reallocation of funds. So we’re looking at some subsidies that are atypical," Ujima Developers CEO Leon Caldwell said. "When we had gone with municipal subsidies before, now we’re looking more at philanthropy or impact capital investors.”

President Donald Trump has attempted to cut the budget for the Department of Housing and Urban Development by billions of dollars each year he has been in office, most recently by $8.6B from 2020's final total of $56.5B. The final 2021 budget has been delayed for months, partly due to the on-again, off-again negotiations for a second coronavirus relief bill, so a continuing resolution from Congress extended the 2020 allocations until the next budget can be approved.

One of the most common mechanisms for private financing of affordable housing, senior or otherwise, is the Low-Income Housing Tax Credit. The LIHTC program has per-capita limits on how much can be awarded each year by state housing agencies, but affordable housing developers that are allocated the credits gain financing by selling those credits to private capital sources.

Clockwise from top left: Ujima Developers' Leon Caldwell, Wellness Senior Living's Hanh Brown and Pennrose Properties' Jacob Fisher

How much those sources of capital are willing to pay for LIHTCs is heavily affected by how those sources are taxed, Fisher said. When Trump, as part of the Tax Cuts and Jobs Act of 2017, lowered the corporate tax from a variable rate between 15% and 35% based on a company’s profits to a flat 21%, that depressed the LIHTC market and made affordable housing harder to finance, Fisher said.

“If the corporate tax comes back to a higher level, that could bring more investors back into the game and push the tax credit price up,” Fisher said. “As investors pay more for it, that will help with our capital stacks.”

Though the 2017 law was directed by the Trump administration, it took the cooperation of a Republican-led Congress to pass. In the two years since the Democrats won a majority in the House of Representatives, the annual HUD budget has increased by about $9B. At the congressional and presidential levels, how Election Day shakes out will go a long way toward determining the market for new affordable senior housing.

“This [time it] is all one big amalgamation of change, and it’s going to wreak havoc at least on senior housing development, particularly in the [lower-income] neighborhoods I’m most concerned about,” Caldwell said. “If you can afford to live in places where senior housing can be paid for by your senior income, then great. But we hope this crisis doesn’t shrink the budget for affordable senior housing, because it will cause major problems.”

As different cities pass their annual budgets at different times of the year, not all funding is distributed on the same schedule. But while next year will give a fuller picture of just how hard budgets will be hit, some of the cuts have already started.

“I’ve had a subsidy pulled because a city budget shrank," Caldwell said. "So we’ve had to look for state subsidies, which are more competitive, and [in] the state I’m operating in, smaller, minority developers are not in those rooms.”

On top of the continued growth in the senior population, new housing for lower-income seniors will be desperately needed because of the new challenges posed by the coronavirus pandemic. Nursing homes were early clusters of infection, but all forms of senior housing were more likely to see negative health impacts of isolation as a result of public health measures.

What once worked for senior housing may not apply again for years, given the rate of the virus's spread and with no timeline for the widespread distribution of a vaccine. That means bold investment will be needed to carve a new path forward, which would be much easier with more government backing.

“Innovation is needed, but people don’t like funding innovation when they’re stressed, and markets are stressed right now,” Caldwell said.